FSB launches probe into non-bank debt to curb hedge fund borrowing

The Financial Stability Board (FSB) is initiating an investigation into the buildup of debt outside traditional banks, aiming to restrict hedge funds’ borrowing practices and enhance transparency. 

The Financial Stability Board (FSB) is initiating an investigation into the buildup of debt outside traditional banks, aiming to restrict hedge funds’ borrowing practices and enhance transparency. 

FSB Chair Klaas Knot expressed concerns about the growing risks posed by non-banks, such as hedge funds and private capital, emphasizing the need to address these vulnerabilities. Non-banks’ excessive leverage can potentially jeopardize financial stability, as witnessed during the March 2020 bond market turmoil at the onset of the COVID-19 pandemic. 

Knot highlighted the importance of transparency and suggested that sharing information on lending to hedge funds and other institutions could mitigate some risks. However, he also hinted at the possibility of actively constraining leverage in certain areas. While the FSB lacks legal authority, it can influence the agenda through recommendations and member jurisdictions’ actions. 

The FSB intends to announce recommendations for monitoring and limiting non-bank leverage in the coming year. Possible measures may include pushing banks to demand more collateral from investment funds for certain types of securities, ultimately restricting lending. Knot also pointed to the Archegos Capital collapse in 2021 as an illustration of the dangers of inadequate information regarding non-banks’ borrowing. 

The review will be co-chaired by Sarah Pritchard, head of markets at the UK Financial Conduct Authority, and Cornelia Holthausen, head of financial stability at the European Central Bank. Verena Ross, head of Europe’s securities regulator Esma, welcomed efforts to enhance transparency and stressed the importance of banks having a clear understanding of their lending recipients to ensure they comprehend their positions. 

Read more: https://www.ft.com/content/dbbfd328-3ec7-4941-9b6c-6e7298f265f6